# Capital Budgeting

Pages: 4 (1147 words) Published: January 8, 2013
Capital Budgeting

Part I
PV= FV / (1+i)^y PV= present value, FV= future value, i= discount rate, and y= time. 1a) If the discount rate is 0%, what is the projects net present value? YearCash FlowDiscount RateDiscounted Cash Flow

0-\$400,0000%-\$400,000
1 \$100,0000% \$100,000
2 \$120,0000% \$120,000
3 \$850,0000% \$850,000
Answer: The projects net present value is \$670,000
If the discount rate is 2%, what is the projects net present value? YearCash FlowDiscount RateDiscounted Cash Flow
0-\$400,0002%-\$400,000
1 \$100,0002% \$98,039
2 \$120,0002% \$115,340
3 \$850,0002% \$800,974
Answer: The projects net present value is \$614,353.45
If the discount rate is 6%, what is the projects net present value? YearCash FlowDiscount RateDiscounted Cash Flow
0-\$400,0006%-\$400,000
1 \$100,0006% \$94,340
2 \$120,0006% \$106,800
3 \$850,0006% \$713,676
Answer: The projects net present value is \$514,815.59
If the discount rate is 11%, what is the projects net present value? YearCash FlowDiscount RateDiscounted Cash Flow
0-\$400,00011%-\$400,000
1 \$100,00011% \$90,090
2 \$120,00011% \$97,395
3 \$850,00011% \$621,513
Answer: The projects net present value is \$408,997.46
With a cost of Capital of 5%, what is this project's modified internal rate of return (MIRR)? The formula is: MIRR = (-FV/PV)1/n-1-1
Answer: For this project, the projected MIRR is 42.72%
My next task was to build a graph and explain what is showed. Answer: The graph showed the net present value decreased as the discount rate increased. The net present value crosses the horizontal line at approximately 42%, just before the Modified internal rate of return of 42.72%. 1b) What is the projects internal rate of return?

If the discount rate is...

References: Anthes, G. (2003, February 17). Internal rate of return. Retrieved 29 October 2012, from http://www.computerworld.com/s/article/78524/ROI_Guide_Internal_Rate_of_Return
Anthes, G. (2003, February 17). Net present value. Retrieved 29 October 2012, from http://www.computerworld.com/s/article/78530/ROI_Guide_Net_Present_Value